The Bond Dream Room

[pp4me]

What a difference a day makes. So are bonds getting hammered or are they galloping like a herd of wild horses?

No need to answer really. I use the PP so I don't have to think that much about it.

[buddtholomew]

The question for me was how far yields would climb before they fell, not if they would fall.

[Ad Orientem]

Barring aggressive intervention by central banks, I don't see bond yields being sustainable at these levels over the long term. It seems increasingly likely that a vaccine will be available to the general public sometime in 2021. That means next year is likely to see the beginning of the end of the Covid crisis. With the Fed pledged to support inflation, and the economic recovery likely to gain steam, I fond it hard to see the attraction for most investors in longer term bonds that are basically guaranteed to offer a negative real interest rate as opposed to equities, or just about any other asset class.

[mathjak107]

The question for me was how far yields would climb before they fell, not if they would fall.

the historical average was 5%

[pmward]

The question for me was how far yields would climb before they fell, not if they would fall.

the historical average was 5%

Historical average is history. There's no reason to assume that a historical average will, or even should, be the future average. America is a lot more "developed" these days. To get a 5% yield you need strong sustained growth. It would be incredibly difficult to get an economy our size to grow at a large enough and sustained enough clip to justify 5% yields.

[mathjak107]

I agree but non the less that is the range for much of history ....where we go from here no one knows

[pmward]

I agree but non the less that is the range for much of history ....where we go from here no one knows

Agreed. Of all the major asset classes, bonds are the most unpredictable and difficult to trade. In the medium term, the last 2 years were really good for bonds. It's not unreasonable to expect to see some mean reversion going forward. How long and how far that mean reversion goes, and whether or not yields have reached a secular bottom, we will have to wait to find out. The real important question is whether or not that mean reversion is accompanied by a boost in economic growth. If it is, then secular bottom being in is possible. If not, then secular bottom being in is unlikely. S&P 500 earnings in aggregate peaked all the way back in 2012. The economy has been much weaker than most people realize. In that environment, it's not surprising at all that the secular bond bull market has continued over the last 8 years, even though it hasn't been a straight shot and has had a few (sometimes large) mean reverting episodes.